Major benchmarks closed in the red following an up-and-down session Wednesday. The Dow Jones Industrial Average (DJINDICES: ^DJI) fell 300 points in the morning and recovered to positive territory around midday before slipping in the afternoon. The broader S&P 500 (SNPINDEX: ^GSPC) ended the day close to even.
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Data source: Yahoo! Finance.
A rise in long-term interest rates hurt homebuilding stocks but boosted the financial sector. The iShares US Home Construction ETF (NYSEMKT: ITB) dropped 2.2% while the Financial Select Sector SPDR ETF (NYSEMKT: XLF) had a 1% gain.
As for individual stocks, Netflix (NASDAQ: NFLX) got a boost from strong subscriber growth, and IBM (NYSE: IBM) reported a decline in revenue.
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Subscriber growth propels Netflix
Shares of Netflix rose 5.3% after the company announced membership growth that was stronger than expected. The streaming entertainment company added 6.96 million new members in the quarter, far exceeding its guidance for 5.15 million additions. Revenue increased 34% to $4 billion, matching earlier guidance, and earnings per share tripled to $0.89, well above the $0.68 the company said to expect.
Most of the subscription additions came from the company's international expansion, but new member additions in the U.S. surpassed expectations as well. Netflix added 5.87 million new subscribers outside the U.S. and 1.09 million domestically, which was a 1.9% increase. Total membership grew 25.5% year over year to 137.1 million.
Operating margin expanded 5 percentage points to 12% from the period a year earlier, but the company warned that it will fall to 5% next quarter due to the timing of payments for new content. Netflix had negative cash flow of $859 million as the company continues to invest heavily in producing original content. For the full year, Netflix expects free cash flow to be "closer to -$3 billion than to -$4 billion."
The beat on membership additions went a long way toward erasing last quarter's disappointment in the closely watched metric, and reassured investors that Netflix is not losing momentum despite growing competition.
IBM falters in its turnaround
IBM disappointed investors by reporting a decline in revenue, ending a streak of three straight quarters of growth, and shares plummeted 7.6%. Revenue fell 2.1% to $18.8 billion, missing the consensus analyst expectation of $19.1 billion. Non-GAAP earnings per share grew 3.6% to $3.42, beating expectations by $0.02.
If it weren't for a strengthening dollar, IBM's revenue would have been flat from a year before. The global business services segment grew revenue by 1%, and the systems segment, which includes mainframe sales, grew 1% as well. But revenue from cognitive solutions, which includes applications built around some of IBM's forward-looking technologies such as artificial intelligence, data analytics, and blockchain, fell 6%.
There was some good news, though, with gross profit margin holding steady from last year, the strongest year-to-year gross margin performance in three years, and non-GAAP, pre-tax income margin improving by 50 basis points. The company also maintained its EPS guidance for the full year.
IBM has been working on a multiyear turnaround to replace legacy businesses with revenue from "strategic imperatives." That paid off in the form of a growing top line earlier this year. The company is still making some progress, but investors seemed to view this quarter as a step backwards.
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